Self-Directed IRA: Invest In Alternative Assets For Retirement

Self-directed individual retirement accounts (SDIRAs) are traditional or Roth IRAs with expanded investment options. SDIRAs allow you to invest in more diversified assets, such as precious metals, real estate, cryptocurrency and more.

While not the investment strategy for everyone, self-directed IRAs can make sense if you have a higher risk tolerance, have more time to save and use it to diversify your investments.

What Is a Self-Directed IRA?

A self-directed IRA is a tax-advantaged retirement account where you can invest your income. These accounts can hold pre-tax contributions or post-tax, depending on your financial goals and needs.

SDIRAs are relatively uncommon compared to traditional IRAs. But they receive a lot of attention online because of their niches. When structured correctly, retirement funds can be used to purchase nontraditional assets, like real estate, physical precious metals, startups and many other types of investments.

Example: If you open a self-directed gold IRA, there are certain stipulations that you must follow. Physical gold assets for your self-directed IRA for gold must be stored within an IRS-approved custodian or trustee. Not following these tax rules could potentially trigger taxes and penalties on the assets.

How Does a Self-Directed IRA Work?

A SDIRA operates much like a traditional or Roth IRA, but you have greater control over your investment choices. When you open a self-directed IRA, you work with a specialized custodian or trustee who administers the account and ensures compliance with IRS regulations. Although the custodian holds the assets, you’ll make all the investment decisions, including what to buy or sell, and when.

Types of Self-Directed IRAs

When researching your IRA options, you may come across services that offer exotic individual retirement accounts like gold IRAs, bitcoin IRAs and more.

Precious Metal IRAs

There are self-directed IRAs that allow you to invest in precious metals for retirement. For example, a gold IRA allows you to own physical gold bullion. Precious metal IRAs often come with associated fees, such as storage.

Cryptocurrency IRAs

There are a variety of self-directed IRAs designed to hold cryptocurrency. For people who believe in the long-term viability of crypto, investing in a bitcoin IRA for retirement could be a viable option.

Self-Directed SEP IRAs

Simplified Employee Pension IRAs, commonly known as the SEP IRAs, are designed for self-employed individuals or small business owners. They make it easy for entrepreneurs to make tax-deductible contributions on behalf of themselves and eligible employees.

Self-Directed SIMPLE IRAs

A SIMPLE IRA is another retirement plan for small businesses. It allows both employers and employees to make contributions. A self-directed SIMPLE IRA can provide investment choices beyond traditional options.

Real Estate IRA

With a self-directed real estate IRA, you can invest in many different types of real estate. You might invest in commercial properties like manufacturing plants, hospitals or resorts. Residential properties are also an investment option, such as apartment complexes, duplexes or vacation rentals.

Self-Directed IRA Rules

While a self-directed IRA gives you more investment freedom, it also comes with stricter oversight and IRS regulations. Failing to follow these rules can result in penalties or even the disqualification of your IRA’s tax-advantaged status.

• Prohibited transactions: You cannot use your self-directed IRA to engage in transactions for your personal benefit or for close relatives. For example, you can’t buy a property with your IRA and then live in it or rent it out to your children.
• Disqualified persons: These individuals include you, your spouse, parents, grandparents, children and grandchildren. Transactions between these individuals and the entities they own are not allowed.
• Unpermitted investments: You cannot invest in life insurance or certain collectibles like art, antiques or wine.
• Custodian requirement: SDIRAs must be held by an IRS-approved custodian or trustee.
• Due diligence: To avoid fraud or mismanagement, it’s up to you to research and verify each investment opportunity.
• Unrelated business income tax (UBIT): If your IRA earns income from a business or debt-financed property, the income may be subject to tax.

Self-Directed IRA Benefits

Unlike traditional IRAs, where your main investments are stocks, bonds and funds, a self-directed IRA has more flexible investment options with a potential for higher returns.

• Potential for higher returns. Some investments, like real estate and startup businesses, can be riskier than blue-chip stocks or fixed-income instruments, but they can be lucrative.
• More investing options. Instead of stocks, bonds and funds, SDIRAs allow you to invest in more options, like real estate, precious metals, cryptocurrency, tax liens and private equity, to name a few.
• Estate planning. Some types of self-directed IRA accounts allow you to pass the account to beneficiaries with little to no tax, like a Roth IRA.

Self-Directed IRA Disadvantages and Risks

Investing in SDIRAs does not come without risk, and financial advisors recommend you be careful with this type of investing account.

“You need to be careful when making these investments, as you need to deal with IRA compliance rules, as well as avoiding prohibited transactions, which can trigger taxes and penalties,” says Ben Westerman, a senior wealth advisor at accounting firm CLA. For those who want to invest in these alternative asset classes, proceed with caution and always work with a trusted financial advisor.

• Less liquidity. Assets like real estate and private equity are not liquid and can take significant time to sell. This makes it difficult to get your money quickly.
• More and higher fees. Self-directed IRAs often see higher fees to cover the costs of a specialized custodian and the administrative challenges of managing alternative assets. You may also see additional fees associated with transactions and specific assets.
• Lack of diversification. While it may seem like you are investing in more diverse assets, those who invest in SDIRAs often find themselves spread thin across larger assets, like a local business or chunk of real estate.
• Greater risk for IRS rule violations. The largest risk is the likelihood of violating IRS rules. Without proper due diligence, you may accidentally invest in prohibited transactions or go against tax compliance. This, when severe, can render your entire investment account null.
• More risk. Cryptocurrencies and startups are riskier and more volatile investments than stocks and bonds.

How to Open a Self-Directed IRA

Opening a self-directed IRA isn’t as easy as traditional IRAs, but there is a simple process to follow:

1. Find a custodian. Self-directed IRA custodians can be banks, trust companies or another entity approved by the IRS. Do your research to make sure you choose a reputable custodian to avoid fraudulent activity and tax complications.
2. Choose what products to buy. Once you figure out where you want to open a self-directed IRA, you can determine which alternative investments you want to purchase. Some custodians specialize in specific types of assets, like gold or bitcoin, while others are more general, so it may be helpful to determine your alternative assets of choice before choosing a custodian.
3. Complete the transaction. Once you’ve found your custodian and dealer, you can instruct your custodian to purchase your investments.
4. When the time comes, plan your withdrawals. Self-directed IRAs are subject to the same withdrawal rules as other IRAs, so you’ll owe taxes on any money that hasn’t been taxed before, except for earnings in a Roth account. If you take a withdrawal before you are 59½, you might be on the hook for paying taxes on a “premature distribution” unless an exception applies. If an exception doesn’t apply, you’ll have to pay taxes on the distribution plus a 10% additional tax.

How to Fund Your Self-Directed IRA

Funding a self-directed IRA is like funding a traditional or Roth IRA. But it’s important to do it correctly:

• Direct contributions: You can make annual contributions up to the IRS limit — $7,500 in 2026 (or $8,600 in 2026 if you’re age 50 or older).
• Transfers: You can transfer funds from another IRA, such as a traditional, Roth, SEP or SIMPLE IRA, into your self-directed IRA.
• Rollovers: You can roll over funds from an employer-sponsored plan, like a 401(k) or 403(b), into your self-directed IRA.

Self-Directed IRA Contribution Limits 2026

In 2026, IRA contribution limits rose to $7,500 for anyone under the age of 50 and $8,600 for those ages 50 and older who contribute regular catch-up contributions.

What Assets Can You Own in a Self-Directed IRA?

Self-directed IRAs are much more flexible than traditional IRAs and offer many alternative ways to invest. A few examples of nontraditional assets in a self-directed IRA include:

• Cryptocurrency, like bitcoin or Ethereum.
• Precious metals, including gold, silver and palladium at or above certain purity standards.
• Real estate, including residential and commercial buildings
• Loans, such as private credit and peer-to-peer lending.
• Private equity, allowing you to invest in private companies or startups.

Note: Make sure all investments meet IRS requirements and purity standards. Otherwise, your investments may break IRS rules and compliance.

Difference between a Self-Directed IRA and a Traditional IRA?

A self-directed IRA and a traditional IRA can have the same structure, where you delay taxes on your invested income until you reach retirement age. The key difference lies in the type of investment you can make.

With a traditional IRA, you are mostly limited to conventional assets like stocks, bonds, mutual or exchange-traded funds. SDIRAs offer much more flexibility because you can invest in markets like crypto, real estate and precious metals.

Traditional IRAs are typically held at financial institutions that offer preapproved investment options. Self-directed IRAs are managed by specialized custodians who hold assets and ensure IRS compliance.

Self-Directed IRA Withdrawals

Like all retirement accounts, you generally need to wait until you reach the retirement age of 59½ before you access self-directed IRA funds. Because these IRAs can hold either pre- or post-tax contributions, you will either pay income tax on withdrawals (traditional IRA) or no tax at all (as with Roth IRAs).

Like traditional IRAs, you will need to pay the required minimum distribution (RMDs) on traditional self-directed IRAs. That means you’re required to take money out of your account each year starting at age 73.

“One has to be really careful with required minimum distributions,” Gardezy says. “If you are required to take these distributions, or coming up on that age, and you have a significant portion of your retirement assets in highly illiquid SDIRA assets, then you could find yourself in a position where you can’t satisfy the RMD requirement, and then you’ll be subject to a 25% penalty for failing to take the RMD.”

Note: Because they hold nontraditional assets, such as real estate or precious metals, self-directed IRAs may be less liquid. This can make withdrawals more complicated. When you are ready to make withdrawals, you may want to allocate extra time to sell the underlying assets.

Should You Save With a Self-Directed IRA?

The risks of SDIRAs may not outweigh the rewards. In many cases, you can now invest in similar assets to a traditional IRA. “Nowadays, with how democratized alternative investments have become, one can just invest in top-tier private equity, private real estate, and other unique strategies directly from their IRA housed at a traditional investment firm,” Gardezy adds.

Yet, a self-directed IRA may be the right choice for someone who has the risk tolerance and time for due diligence. In that case, this retirement account may be worthwhile.

Frequently Asked Questions (FAQs)